Pages

Tuesday, September 3, 2013

America Re-Leverages: The Benefactors & How This Story Ends

The re-leveraging of America has not helped all sectors of the economy equally. A large amount of the new money created since 2008 has made its way into financial assets. This has brought the stock market to new all time record highs, brought the bond market (until recently) to new record highs and halted the decline in real estate prices as speculative capital is now flooding the sector. Higher asset prices help the ultra rich who control the vast majority of stocks, bonds, and real estate in America.

The hope is that they will go out and spend with confidence, now backed by their juiced up portfolios, and create a what is known as the trickle down effect for the rest of the economy. They have certainly been spending as there are once again bidding wars for super high end mansions, expensive art, rare cars, and other valuables. A 1967 Ferrari convertible just recently sold for $27.5 million. The grey line on the chart below shows that classic car prices have pulled away from the others on the valuables index as the new "must have" toy for the ultra rich.

The problem is that this wealth has not yet "trickled down." Those making $50k or more per year are experiencing a surge in consumer confidence while those making less are experiencing a decline. The gap is now the greatest in history.

Most of the jobs in the re-leveraging recovery have come in the form of waitress, bartender, low pay, or part time positions.

Income levels for those that have been fortunate enough to find work are not keeping pace with the cost of living. Utility bills, medical costs, gasoline, and food costs are rising, which is taking away disposable income for the middle class. The following chart shows the decline in median household income since the current depression began in December of 2007.

46% of Americans own no stock investments and 40% of Americans do not own a home. They feel no benefit from Bernanke's asset price stimulation, only a rising cost of living. Students graduating from college are smothered with the burden of student loan repayments, which reduces their ability to save or invest, as well as their entrepreneurial spirit.

While the middle class worker is running in quicksand, corporations are seeing their profits surge to new all time record highs. During the re-leveraging of America, corporations slashed their biggest cost (employees) and they have done everything possible to keep that cost off their balance sheet.

Productivity, which measures the goods and services generated per hour, continues to improve while compensation has flat lined over the past 3 decades. This is due to the continued improvements in technology and the ability to save costs by outsourcing jobs overseas.

Can the economy continue to grow based on financial asset price appreciation benefiting exclusively the ultra wealthy while the middle class of the country continues to be hollowed out and withers away?

Of course not. This process will continue until the artificial mirage created by central banks around the world dissipates. It will end when central banks lose control of interest rates, currency values, or both; something that markets incorrectly believe they have control over. This is the next black swan event waiting for the markets, and the world experienced the first preview of this event in June of this year as both stocks and bonds sold off together around the world.

Ultimately, a debt crisis cannot be solved by more debt and printed money; it can only be postponed. The delay will ultimately create a much bigger crisis than what we would have experienced in 2008 if we allowed the system to cleanse. John Mauldin had an excellent quote a few weeks ago when he said that "the central banks desire to keep instability out of the markets is creating instability." The reckoning day will be devastating for those that are unprepared, while it will be a wonderful period of investment opportunity for those that understand it is coming.

"We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and but she will never sit down on a cold one either."

- Mark Twain

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait."

- Charlie Munger

"Live as if you were to die tomorrow. Learn as if you were to live forever."

- Gandhi

"One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I wait for a situation that is like the proverbial shooting fish in a barrel."

- Jim Rogers

"Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

- James Grant

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

- Ben Bernanke, March 2007

"Everything that needs to be said has already been said. But since no one was listening, everything must be said again."

- Andre Gide

"When people are getting richer and richer but they're not actually producing anything, it can't end well."

- Louis CK

"In economics things take longer to happen than you think they will, and then they happen faster than you thought they could."

- Rudiger Dornbusch

"I don't write about what I know. I write to find out what I know."

- Patricia Hampl

"Chains of habit are too light to be felt until they are too heavy to be broken."

- Warren Buffett

"Everyone has a plan until they get punched in the mouth."

- Mike Tyson

"Interest on the debt grows without rain."

- Yiddish Proverb

"You can have comfort, or you can have value. You cannot have both."

- Jim Grant

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

- Warren Buffett

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"Men who can both be right and sit tight are uncommon."

- Jesse Livermore

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

-Ludwig von Mises

"Most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them."

- Howard Marks

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."

-Mark Twain

"None are more hopelessly enslaved than those that falsely believe they are free."

-Goethe

"The longer the markets disobey basic rules of valuation, the bigger the opportunity for good investors to reap the benefits. Value investing works precisely because markets become dysfunctional at times."

-John Coumarianos

Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

-Sir John Templeton

"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

- Ludwig von Mises

"People only accept change in necessity and see necessity only in crisis."

-Jean Monnet

Requiring a central bank to print money to increase government's purchasing power invariably ignites a hyperinflationary firestorm. The result through history has been toppled governments and severe threats to societal stability.

- Alan Greenspan

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

- Henry Ford

"Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

-Steve Jobs

"I'd be a bum on the street with a tin cup if the markets were always efficient."

-Warren Buffett

"The market can stay irrational longer than the investor can stay solvent."

- Keynes

"While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future's future. As things grow worse, the government protects itself not by contracting this process, but by expanding it."

-Ayn Rand, 1974

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

- F. Scott Fitzgerald

"All our life, so far as it has definite form, is but a mass of habits - practical, emotional, and intellectual - systemically organized for our weal or woe, and bearing us irresistibly toward our destiny, whatever the latter may be."

-William James

"Men it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay

The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.

- Stephen Hawkings

"Give me control of a nations money supply, and I care not who makes it's laws."

- Amschel Rothchild

Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.

- Sigmund Freud

Many of life's failures are people who did not realize how close they were to success when they gave up.